Business Valuation in Divorce Flashcards
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Read the first 7 Business Valuation in Divorce flashcards as text
When a spouse owns a minority interest in a private company during divorce, which discount is most likely applied?
Answer: Minority interest discount
A minority interest discount reflects the lack of control a minority owner has over business decisions, reducing the proportional value of their share.
Which business valuation method compares a subject company to similar businesses that have recently been sold?
Answer: Guideline transaction method
The guideline transaction method uses sale prices of comparable companies as a benchmark to estimate the subject company's value.
In divorce valuations, 'double-dipping' refers to the controversy of:
Answer: Using business income both to value the business and to calculate support obligations
Double-dipping occurs when the same income stream is used both to capitalize the business value (marital asset) and to compute ongoing support payments.
What is the primary purpose of a 'weighted average cost of capital' (WACC) in business valuation?
Answer: To determine the discount rate reflecting the cost of all capital sources
WACC blends the cost of debt and equity capital, weighted by their proportions, and is commonly used as the discount rate in DCF analysis.
A professional practice owned entirely by one spouse generates revenue solely because of that spouse's reputation and referral network. This value is most likely classified as:
Answer: Personal goodwill
Personal goodwill is tied to the individual owner's skills, reputation, and relationships and is generally non-transferable.
Which financial statement is most critical when using the asset-based approach to value a business in divorce?
Answer: Balance sheet
The asset-based approach starts with the balance sheet, adjusting assets and liabilities to fair market value to determine net asset value.
In divorce proceedings, a business owner spouse increases their own salary significantly in the year before filing. A valuator would most likely:
Answer: Normalize compensation to a market-rate salary to avoid artificially deflating earnings
Valuators normalize owner compensation to market rate to prevent manipulation of earnings that would artificially lower the business's value.